Question

The labor force is 100 million and the unemployment rate is 5 percent. If one million people quit looking for a job, what is this called and what is the new unemployment rate?

A) Encouraged worker, 5%

B) Discouraged worker, 5.05%

C) Discouraged worker, 3%

D) Discouraged worker, 4.04%

I have the correct answer as D, but I don't know how to get that answer.

Answer 1

Unemployment rate = (Unemployed ÷ Labor Force) × 100

Labor Force = People who are employed + People who are not employed but are looking for a job (unemployed)

Initially labor force = 100,000,000

Unemployment rate = 5%

So, total unemployed = 100,000,000 × 0.05 = 5,000,000

Now, it is given that 1,000,000 people quit looking for a job. They are called discouraged workers who are no longer part of the labor force.

New labor force = 100,000,000 – 1,000,000 = 99,000,000

Unemployment rate = (5,000,000 ÷ 99,000,000) × 100

Unemployment rate = 5.05%